Alan C. 'Ace' Greenberg's 'The Rise and Fall of Bear Stearns'

That was Ace Greenberg's tart reply to The New York Times when asked, in May 2008, what advice Bear Stearns CEO Jimmy Cayne ignored prior to the firm's collapse two months earlier.

Alan C. "Ace" Greenberg, the trader who, over a career spanning more than six decades, built Bear into a powerhouse, has now written that book, The Rise and Fall of Bear Stearns, with Mark Singer, a writer for The New Yorker. The book is long on diatribe and gossip. Its analysis of Bear's demise—covered in very few pages—is more cursory than one would have hoped.

During the years Greenberg ran Bear Stearns, he mentored James E. "Jimmy" Cayne. Their relationship grew strained as early as 1988, when Cayne became Bear's president. It deteriorated further as Cayne gained power from Greenberg. In addition to blaming Cayne for creating the environment that led to Bear's collapse, Greenberg's book seeks to rebut William D. Cohan's House of Cards, which portrays Ace as sometimes ruthless and small-minded. He asserts that Cohan accepts Cayne's "fanciful history of [Cayne's] career" at Greenberg's expense. Greenberg is more successful in attacking Cayne than Cohan, whose well-balanced, exhaustive analysis remains the definitive study of Bear's epic fall.

Greenberg says the firm's profits grew sharply under Cayne's leadership. He also says Cayne was a dope-smoking megalomaniac more interested in his bridge game than in supervision of the firm. He downplays Cayne's assertion that Bear Stearns was the victim of a "bear raid" by short-sellers who had spread false rumors of its imminent bankruptcy. Instead he blames Bear—especially the fixed-income department—for using too much leverage to build its mortgage-backed securities portfolio.

Despite his reputation as a highly adept risk manager, Greenberg says his warnings to Cayne that the firm was overleveraged were ignored. Greenberg admits, however, that he failed to raise the alarm with Warren Spector, who headed Bear's fixed-income department. His explanation—that Spector "insisted upon being 100 percent in control of his department"—is unconvincing, given Greenberg's well-known enthusiasm for his own opinions.

In an interview with Cohan, Cayne dismissed his former mentor: "There isn't anybody that would tell you they choose him as their best man, or best friend, or one who they would have lunch with, or go on a trip with, or socialize with, or whatever. They don't exist. He had one friend—me."

Cayne also told Cohan that Greenberg's "narcissism" was behind his more eccentric charitable donations, including his 1998 gift of $1 million to provide poor men with Viagra prescriptions. Greenberg says that most people reacted favorably to his gift, and chronicles several of Cayne's grandiose moments. "Why was it that a single elevator in the lobby had to be reserved for one person?" he asks. When Cayne agreed to limit his reservation of the elevator to an hour a day, Greenberg notes that the hour was from 8 to 9 a.m., "just when everybody needs to use it."

Greenberg also recalls Cayne's absence from executive committee deliberations over a proposed $10.7 billion commitment, because, he writes, it conflicted with a regular summer golf date that he reached every Thursday afternoon by helicopter. "This particular example of Jimmy's egotism, tone deafness, and clueless contempt for the rest of us still provokes my outrage," he says.

Greenberg and Cayne differed over whether Bear's executives should have held on to the stock they received as part of their compensation. Greenberg had sold millions of shares over the years, enabling him to withstand the firm's collapse, while Cayne, who considered such sales inconsistent with leadership, held on to his and suffered paper losses of nearly $1 billion when Bear was sold to JPMorgan Chase (JPM) in March 2008.

The Cayne-Greenberg dogfight that ensued overwhelms the book's backstory: Bear Stearns' rise to prominence and power and Greenberg's remarkable role in building it. That story is also worth remembering.

Ace grew up in Oklahoma City, where he was a high school track and football star. After graduating from the University of Missouri, he came to New York. He joined Bear Stearns, then an investment firm with 125 employees, in March 1949. By the time he turned 40 he was effectively running it, his power confirmed in 1978, shortly after the death of Salim L. "Cy" Lewis. During Lewis' last years in control at Bear, he and Greenberg argued about many things—including Lewis' son, Sandy, whom Cy wanted to hire despite a firm rule that prohibited nepotism. Greenberg prevailed. Sandy Lewis told Cohan that his father "hated" Greenberg, a man "so cold my father used to say he pissed ice water."

Under Greenberg's control, Bear's profits grew quickly. At its peak it employed almost 15,000 people. While most Wall Street firms preferred to hire Ivy Leaguers, Greenberg looked for people with "PSD" degrees, by which he meant "poor, smart, and a deep desire to become rich." Along the way, he developed a disciplined style of investing—"unload losers, ride winners"—that served him and hundreds of loyal individual clients well over the years.

I became one of those clients 11 years ago as an executive and editor at Time Warner Inc. (TWX) I had accumulated vested stock options that, if exercised, would represent the majority of my net worth. The options gave me nightmares. Should I hold? Should I sell?

My tax accountant—the now-notorious Kenneth I. Starr, who was recently indicted for allegedly bilking his customers—arranged for me to call Greenberg. Ace, who answered his own phone, told me to meet him in his office, a desk on the Bear trading floor, the next day at 7 a.m. Over coffee he asked why Time Warner used EBITDA (earnings before interest, taxes, depreciation, and amortization) when reporting results instead of "EBITDARE." "What's 'EBITDARE?' " I asked. I had never heard the term during a long career in business journalism. "What do 'R' and 'E' stand for?"

"Rent and electricity," he replied. "If they are going to mask their lack of earnings with all that other stuff, why don't they throw in rent and electricity as well? Exercise every option and get out of the stock."

I followed his succinct advice. A couple years later, Time Warner merged with AOL, destroying Time Warner's share value and the value of its options. Ace's counsel, dispensed over a few seconds, was typical of the wisdom that made him a hero to satisfied customers like me.

If Ace's story ended then, his autobiography would have justly celebrated one of Wall Street's greatest stockpickers and executives. That, alas, was not to be. Instead, his and our bitter memories of Bear Stearns' collapse define his coda.

CONTRIBUTORS' CORNER

By Ira Boudway

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